Kobayashi Pharmaceutical 4967
October 22, 2021 - 10:38pm EST by
2021 2022
Price: 8,610.00 EPS 2.2 2.3
Shares Out. (in M): 78 P/E 25 24
Market Cap (in $M): 5,925 P/FCF 31 30
Net Debt (in $M): 1,254 EBIT 230 250
TEV (in $M): 4,670 TEV/EBIT 20 19

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Brief Introduction 

Kobayashi (4967 JP) is one of my favourite companies in the world, a 125+ year old Japanese company, with an exceptionally wide moat, due to its "idea culture" of creating and dominating niches, with products that do not require "change" and therefore with a higher predictability. The company is as old as Coke and Wrigley's Chewing Gum and I believe meet's Mr. Buffett's threshold for a very high quality company. 

Kobayashi is rare in Japan (and Asia) for its culture of empowering employees to propose nearly 58000 new ideas every year, as a result over 30 new products are launched each year and in the past, new product contribution was as high as 20% in year 3/4.

Kobayashi has had 23 consecutive periods of profit growth and has increased dividends successively and bought back stock (during crisis periods).

Kobayashi has earned 40% returns on incremental capital even during crisis periods. It has created a ROIC tree for each business and incentivizes staff on ROIC, breaking down the key drivers. Returns on tangible equity ex cash are as high as 50%. Cost of capital negligible, so large excess value creation. It had divested its original wholesale business in 2008 (1/2 of sales), so there was a large drop in sales, but increased in margins, asset efficiency and cash conversion. 

The opportunity exists as the stock has declined over 31% this year due to lockdowns in Japan and Asia, and a sharp decline in foreign visitors to Japan. In Aug 2021, Japan had just 26000 international visitors, down 99% from Aug 2019 where it had an astounding 2.5 million! 

The company's goal is to achieve consolidated sales of Y280bn by 2030, of which Y90bn will originate from markets outside Japan, this international sales is expected to increase by 4.5 times. Currently, sales are Y150bn and Y20bn from overseas. 

At current stock price, the company trades at approx 10% normalized operating cash flow yields and 3-4% normalized free cash flow yields, earnings multiples are around 25x after adjusting for one offs and cash/LT investments. I expect over the next decade the stock to return high teens annual CAGR and potentially higher, if Mr. Market provides even better entry prices. This is not a get rich fast stock, but will certainly beat the Japanese market and elsewhere over the next decade, the company already has since 2013.


* Unfortunately, I lost my detailed draft along the edits and so I had to rewrite a shorter version below but it should provide a jist for VIC members * 

Idea Company with Exceptional Decentralized Culture is a Hidden Moat

Kobayashi has a unique philosophy of “big fish in a small pond” with 40-60% market share in niches. This means i) finding an undiscovered pond, ii) dominating the niche, iii) growing the pond large and repeating by iv) creating new niches.

Kobayashi had a history of creating niches  like body warmers, oral hygiene, lens cleaner, toilet bowl cleaners, obesity remedies, baby products, etc.  

Each year 55,000 ideas are submitted by employees, a process that began in 1982. This de-centralized culture led to new niches in new markets contributing 20-25% of sales in 4 years. Unique initiatives include President’s special award for outstanding ideas and idea competitions.

Please see below filing extract that highlights the company's exceptional idea culture 

The Netsusama Sheet Story: Kobayashi’s Unique Idea Culture

The graphic below illustrates a niche, the Netsusama Sheet. The idea was recommended by one employee. Today it sells 400mm sheets in 20 countries with 56% of sales derived outside Japan. Today, it is amongst the 12 must buy Japanese products in China.

There are hundreds of such niche products, that Kobayashi has invented that could be targetted to consumers in Asia over the next 10 years.

The company has a free and open culture, with employees encouraged to propose new ideas, each year over 57000 new ideas are proposed at all levels of the company.


Historical context : A Century of Value Creation Dominating Niches

Please see below filing extract that highlights the company's 125+ year old history of value creation.


150+ Brands and Niche Products That Consumers Love

Please see below filing extract that highlights the company's unique niche products and model for creating new markets